Q2 2022 Keurig Dr Pepper Inc Earnings Call
Earnings call for the second quarter of 2022.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
This conference call is being recorded and there will be a question and answer session at the end of the call.
I would now like to introduce Keurig, Dr. Pepper's Vice President of Investor Relations, Mr. Steve Alexander Mr. Alexander Please go ahead.
Thank you and Hello, everyone. Thanks for joining us.
Let me start this morning by introducing our new senior director of IR shaping <unk>, who joined us in May.
Many of you May know Jason from his six years of working on the sell side with Andrew Lazar Barclays followed by our roles over the past few years at American Eagle Outfitters and peloton.
He's a great addition to our team and we believe you will enjoy working with him.
Earlier. This morning, we issued our press release for the second quarter of 2022, you need a copy you can get one on our website in the investors section.
Consistent with previous quarters today, we will even discussing our performance on an adjusted basis, excluding items affecting comparability.
Beginning last quarter, you may recall that we began excluding impact of foreign currency translation from our adjusted results.
The company believes that the adjusted basis provides investors with additional insight into our business and operating performance trends.
While the exclusion of items affecting comparability is not in accordance with GAAP. We believe that the adjusted basis provides meaningful comparisons and an appropriate basis for discussion of our performance.
Details of the excluded items are provided in the reconciliation tables included in our press release, and our 10-Q, which will be filed later today.
Due to the inability to predict the amount and timing of certain impacts outside of the company's control, we do not reconcile our guidance.
Here with us today to discuss our results are Katie feed chairman and CEO , Bob <unk> and ozone Dot Mercia Blue our current CFO and president of International who is transitioning to the CEO role effective tomorrow at which time, Bob will become executive chairman.
Also with us as our Chief Corporate Affairs Officer Maria <unk>.
And finally, our discussion. This morning May include forward looking statements, which are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially and the company undertakes no obligation to update these statements based on subsequent events.
A detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC.
And with that I'll hand, it over to Bob.
Thanks, Steve and good morning, everyone.
Second quarter was one of significant progress for our company in a macro environment that continues to be challenging on many fronts.
Broad based inflation continues to impact industry margin as pricing continues to increase but has not yet caught up to inflation.
The good news is our brand strength has held up well in the face of new pricing with modest elasticity impacts across our portfolio during the quarter.
With concerns have shifted to the potential for recession, it's worth spending a moment on how our categories have performed during previous recessionary period.
During the last significant economic downturn in 2008, and 2009, our lead segment, particularly carbonated soft drinks and coffee.
We're among the CPG categories that held us back.
These categories are true staples with regular consumption behaviors and few direct substitutes.
And they have the benefit from the trade down effect from out of home consumption to in home consumption that frequently occurs during recession.
As we've done successfully in the past.
We will continue to manage <unk> against a range of potential macro outcome and believe that the all weather business model, we've created positions us well as we continue to operate in a challenging environment with significant uncertainty.
Since the formation of <unk>, we have delivered great returns for our shareholders with a four year total shareholder return in excess of 100%.
Well above broad market indices, and nearly all food and beverage peers.
More notable is that these returns were delivered during our transition from a closely held company to a widely held.
With the public market absorbing approximately 675 million new shares into the flow equivalent.
Equivalent to $25 billion in market cap.
With our inclusion in last month in the S&P 500, along with our existing position in the NASDAQ100, we continue to broaden our appeal.
Let me take a few minutes to remind you how the <unk> business model creates value and then I'll, let <unk> apply that framework to our Q2 results.
ADP is underpinned by an attractive and competitive organic total shareholder return algorithm driven.
Driven by a flexible and scalable strategy.
Coffee systems. Our strategy is focused on are tracking about 2 million new households, every year into the keurig system.
While also driving revenue and profit growth among our $36 million existing keurig households through new platforms, such as connected Brewers and new beverage formats and occasion.
Given the size of the remaining addressable new households for the Keurig system, which we estimate at more than $50 million. We have line of sight to household growth well beyond the next 10 years.
In cold beverages, our strategy is focused on driving growth in core brands through marketing and brand renovation.
Filling white space in our portfolio through internal innovation and external partnership.
And enhancing the effectiveness of our omnichannel selling and distribution system <unk>.
Including our company owned direct store distribution system.
The investments we have made in selling and distribution have built a stronger go to market capability that has a multiplier effect on our brand investments.
As evidenced by our consistent share growth.
In addition to our core algorithm Kdd's extraordinary free cash flow enables the potential for incremental shareholder returns through strategic capital allocation.
I will elaborate on this later in the call.
Boson over to you.
Good morning, everyone.
Bob provided an overview of our successful growth strategy.
And I want to spend a moment to highlight our quarter two results in the context of our overall strategy.
On a total company basis net sales at months 13, 5%.
Net price up more than 10% and volume mix up more than 3%.
All four segments posting strong growth.
<unk> adjusted gross profit increased 10%.
While adjusted gross margin declined 180 basis points.
Selecting the timing of that remains between pricing and inflation.
During the call that we experience cost of goods sold inflation across all inputs, including ingredient <unk>.
<unk> and manufacturing labor.
In addition.
We also experienced a much higher rate of inflation in transportation and warehousing.
At the time of robust consumer demand and SG&A installation was also significantly higher.
Taken together, our total inflation for the core then exceeded 17%.
Which was more than two percentage points higher than the 15% we experienced in quarter one.
As a result, adjusted operating income declined slightly.
Significantly higher costs to serve offset the 10% increase in adjusted gross profit in the quarter.
All in adjusted net income increased approximately 3%.
Collecting a lower adjusted tax rate and lower interest expense.
Adjusted diluted earnings per share also increased 3% to 39.
And we closed out the first half of this year, we had a much as expected.
Free cash flow for the quarter at $600 million.
Continued to be strong driving a free cash flow conversion ratio of 108%.
Let's shift to a discussion on segment performance, starting with coffee systems.
I am happy to report that our coffee supply recovery plan has been completed I handle schedule.
Part manufacturing output to the store to levels that will provide full service to our partners and retailers.
Why isn't that Texas came at a cost as we discussed last quarter.
Sets us up for a strong second half of the year.
For the quarter coffee systems net sales were up 9%.
Driven by both higher pricing and increased volume mix.
Reflecting the strong sequential improvement in sales.
One of the quarter.
<unk> sales grew 10%.
Net by both higher pricing and higher volume mix, while brewer sales grew almost 6%.
Led by higher pricing that was partially offset by lower volume.
Due to the 29% volume growth comparison in quarter two last year.
Marketing investment in the quarter that was up slightly.
Single serve coffee category pricing was up nearly 9% during the call that based on IRI.
Coffee brands and retailers mitigate the impact of inflation.
Particularly in coffee with new price actions.
We have noted a few industry reports directly linking category volume deceleration in IRI.
With pricing actions and attempting to draw conclusions on it at TCT.
In addition to our typical caveat that syndicated data reflects on the about six 2% of total part too.
Let me also caution you that there is significant noise in the category numbers in quarter two.
Due to the impact of supply chain issues, including all those stocks and significantly reduce category promotional and marketing support.
There are also some timing impacts from consumer mobility with regard to although home coffee consumption during the quarter.
As we move into the second half we continue to expect a strong dollar consumption growth in the category.
Ongoing volume pressure related to increased consumer mobility compared to the prior year.
This is consistent with our prior expectations that at home attachment rates will eventually return to pre COVID-19 levels.
And we are continuing to see this occur.
At the same time, we are seeing improvement in office coffee.
We expect to gradually improve over time.
In this dynamic environment, we continue to track the relationship between single total coffee pricing and other forms of coffee <unk>.
Although home coffee.
Despite the increase in single solid pricing the gaps between formats have remained consistent.
As all forms of coffee, having pleased implies.
Let me shift to some highlights of coffee system growth drivers.
Importantly, we will nation on the lounge, our new K Cup is smart Goulard reached.
Which in one machine is a representation of the cumulative enhancements we have made to <unk> over the past five years.
Okay Company. This month is enabled by our clinic grew with <unk> technology.
Recognizes the pot and adjust the blue for a perfect Cup.
It also features multi stream technology.
Which enabled a wider range of temperature and strength.
Including our best ever rule that ice coffee delivery yet.
This new Blue with also incorporates a new multi speed product.
To enable consumers to create cappuccinos and Lattes says and other speciality coffees.
At <unk> interactive recipe experience.
Okay tubes in the <unk> app.
Taken together the K company this month, enabling consumers to create a coffee shop experience in home at a fraction of the cost.
And with greater appeal to younger households.
With our continued the smart technology development.
We remain on track to reach a million connect with households in the next few years, which continues to unlock new platforms, such as smart auto delivery core parts.
The enhancement to acuity system quality.
And innovation continued to be recognized by key industry players.
And we are pleased to announce the addition of two new Super premium coffee brands into the system.
Intelligentsia, and Black and board joining our roster of partners.
Part of that.
In addition to enabling recruiting system to reach premium consumers with price points of around $1 per pop.
The participation of these brands provides a strong endorsement for the quantity of the coffee delivered by our new Brewers.
Last quarter, we shared that community coffee will also be joining the system as a partner.
Production of K Cup pods on community began this month.
And our licensed sports will be available on <unk> dot com and at retailers nationwide later this year.
In addition to adding new brands, we have had great success in driving growth in existing plants.
My cough cap, which you will recall joined the acuity system and the license plan a few years ago.
As part of this growing brand and single serve coffee this past quarter.
Shifting to cold beverages.
We again grew or held market share across the vast majority of our portfolio.
In carbonated soft drinks, we grew dollar consumption by 11% in the quarter.
On holding on to slightly expanding the substantial share gains we have achieved over the past two plus years.
This past July 4th holiday represented the 20 <unk> consecutive holiday period in which case VP glu carbonated soft drink market share.
We are doing this by leveraging the strength and differentiation of our portfolio.
Social innovations such as Dr Pepper, and cream soda, which was recently ranked by <unk> as the number one food and beverage pacesetter for 2021.
As well as exceptional in market execution and effective marketing.
Core hydration and Snapple two examples of the strength in our <unk>.
Non carbonated portfolio.
Most of which had been held back by supply chain disruption last year.
Core is the fastest growing brand in the premium unsavory water category this year.
We've told our consumption growth of 31% in quarter two.
Apple is benefiting from investment in the Snapple brand refresh launched last year.
Which continues to attract younger consumers and build momentum for the brand.
Driving a lot of market share growth year to date.
We have also had great success in driving growth for our partner brands with polar seltzer, becoming the fastest growing and in Sweden sparkling water brand in the category.
Monthly market share two full share points to 10, 3% in the quarter.
And continuing to grow.
In addition, while the cocoa grew over 16% in the quarter at month's end household penetration by 9% and dollar share by more than four points to 54%.
We didnt cold beverages packaged beverages net sales were up 13% driven.
Driven by both higher pricing and increased volume mix.
And as this is it impacts remaining modest.
Increased marketing investment and the strong in market execution supported continued market share growth in the quarter.
For beverage concentrates net sales were up 23%.
Reflecting higher pricing.
Including the benefit of favorable timing related to trade accruals and higher volume mix.
Finally for Latin America beverages, net sales were up an impressive 27%.
Balanced between higher net pricing.
And increased volume mix.
By a significant increase in marketing investment.
And at CCT for the segment remained modest.
Latin America beverages has been consistently strong performance.
By a portfolio with strong brands such as pending appeal.
Our motto skirt and months.
On a two year basis net sales in the quarter that increased more than 50%.
During the quarter, we announced an agreement to acquire the global rights to the non alcohol ready to drink coffee brand at the peak.
Which is a highly unique offering in the emerging and fast growing non alcohol cocaine segment in Canada.
This new platform complements our strong and successful ready to drink alcohol portfolio in Canada.
And provides <unk> with incremental growth opportunities and an exacting new category.
We completed our minority investment in fact on beverage.
Signed an exclusive agreement to expand innovation and foodservice channels.
Leveraging the strength of our fountain foodservice sales team.
As we announced last quarter truckload offers the first and only certified organic non GMO beverage solutions, specifically tailored to foodservice operators.
While these are great examples of small but strategic investment.
Let me turn it over to Bob to provide some commentary on the broader capital allocation and M&A opportunities for the <unk>.
It will be one of his key focus area as executive chairman.
We have built a business that has been pressured tested by macro volatility and prices.
And has emerged stronger and nimbler than ever.
In the past four years, we have distinguished ourselves as strong operators with the great majority of our team members solely focus on running the business with excellent.
Value of that approach is reflected in our industry, leading TFR since merger and our attractive forward looking organic algorithm.
We also know we have an opportunity to enhance organic shareholder returns through the strategic deployment of our discretionary free cash flow.
We have a proven capability to build new brands and create exceptional value for PDP and our partners by adding new brands into our growth machine.
Look no further than the examples discussed during today's call such as core polar Vita Coco and met Cafe.
Therefore, it's logical for us to consider M&A is our leading opportunity and capital allocation.
We employ a disciplined and rigorous process and our deal evaluation.
Which balances risk versus reward and understands the true underlying value of any new business to us.
We also consider a range of structures to enable us to expand our brand portfolio.
With M&A being one, but not the only path to filling white space.
It's no secret that historically, when our disciplined approach has space lofty valuation expectations from sellers.
The outcome has been fewer acquisition and more strategic partnership for ADP.
We're good with that as.
As we know that no deal.
Or an alternative partnership structure is far better than an overpriced acquisition.
The environment for high growth companies has shifted in recent months and we are encouraged with the conversations that we're having with several potential partners.
We believe that our proven success and creating value for our partners combined with a more challenging investor environment for these entrepreneurs has begun to narrow the bid ask spread.
Time will tell if that improves action ability.
All potential M&A investments compete against the asset this team knows best.
Which is the value of our own equity.
As noted in our press release, we repurchased approximately two 5 million shares during the quarter at an average price of $34 51 per share.
We see opportunistic share buybacks and investment in our internal growth projects as attractive uses of our capital.
Finally, we believe the size of our discretionary cash flow.
Which is expected to be $5 billion over the next three years distinguishes us as a unique investment opportunity.
Both of them will now provide some commentary on our outlook for the balance of the year before we move to Q&A.
As indicated in our press release, we are increasing our guidance for full year constant currency net sales growth to the low double digit range widely affirming our adjusted diluted earnings per share growth in the mid single digit range.
We continue to expect adjusted earnings per share growth in the second half to reach the high single digit range.
Driven by strong performance in the fourth quarter.
Leading to mid single digit growth for the year.
Supporting this guidance, we continue to expect the following unchanged assumptions.
Adjusted interest expense is expected to approximate $430 million.
Our adjusted effective tax rate is expected in the 22 to 22, 5% range.
And diluted weighted shares outstanding are estimated to be approximate the 143 billion assuming no additional share buybacks.
Finally.
Given the current environment I want to share some detailed perspective on our expectations for the second half.
At this point in the year, we have lost any color on input costs and have good line of sight to price realization.
Furthermore, as I expect it to be the strongest of the year in terms of earnings per share diluted.
<unk> quarter, three is expected to look much like quarters too.
The primary driver of the phasing of our second half results is it timing relationship between pricing and installation.
You will recall that inflation in quarter, one was 15%, which.
We took months to more than 17% in quarter two.
We expect inflation to be even higher in quarter three.
Largely driven by our green coffee positions.
Because we are getting the benefit of more pricing in our core <unk> P&L.
We expect to offset this incremental inflation to deliver EPS growth for the core of that.
In quarter. Therefore, we expect the they bill inflation versus the prior year to be roughly half the rate of core debt free.
As a reminder.
We will be lapping the significant spike in inflation, we experienced in quarter four last year, and we will realize the full benefits of our pricing already taken which will enable us to offset inflation and deliver margin improvement in the fourth quarter.
Finally, I want to acknowledge that tomorrow, I will assume the CEO role off K VP.
I am honored to take on the leadership of this great company, including our 27000 dedicated employees and I greatly appreciate it.
<unk> in support of Bob Our board of directors, and our executive leadership team.
Looking ahead.
I couldnt be more excited about the growth potential I see for K VP in this new chapter.
Have the opportunity to leverage all new focus we've made since the merger to further strength our brands enhance our go to market capabilities.
Build our world class team.
Doing this will enable us Hello list the execute our strategic plan.
Wireless standing ready to proactively capitalize on new opportunities that come our way and phase whatever macro challenges arise.
Thus as we did in our last chocolate.
<unk> has distinguished itself as a flexible nimble and fast and into these key attributes.
Again differentiate us moving forward.
I will now hand, it back to the operator for your questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
You are using a speakerphone please pick up your handset before pressing the keys.
If at any time your question has been addressed and you'd like to withdraw. Your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Bryan Spillane with Bank of America.
Please go ahead.
Thanks, operator, good morning, everyone.
Great Brian .
Two questions for me one <unk>, we're kind of looking into the back half of the year.
And just thinking about pricing and inflation.
Are there plans further price increases in our cold beverages in the back half of the year or have you pretty much through push put in all the price you need to cover inflation, then I have a follow up.
Yes.
Thanks, Brian for the question.
First of all if it be also important to note that.
Because as you know pricing, obviously goes hand in hand with inflation, what's going on in the macroeconomic environment.
Lastly, a comment on the input cost side and also <unk>.
Good line of sight into the price realization for the remainder of the year.
So it's very clear for us so at the same time as we have announced.
At all times that are starting from 2021 as well as early this year as well as early quarter. Two we have taken several pricing actions across our portfolio. Both in the coffee systems as well as across beverages. So lowest pricing activities went through and as you know we don't necessarily.
<unk>.
With regards to future action plans in terms of the detailed pricing action plans, but as we have done previously depending on how the macro economic situation is going to trend.
Along with the installation.
Ready to take further action plans as well as activate several of other levers that we have been managing our business. As you know we don't necessarily adjust their focus of fixate on one level, we have multiple levers in our businesses starting with the volume.
Combined with the mixed management, and obviously productivity delivery in relation to the pricing and all that.
Business investment so we have several levers available for us in order to pool and continue to weather. The storm as we have been doing the last 40 years. Therefore, if the macro economic situation changes.
Along with the expectations that we have.
We'll take the necessary measures in order to put further pricing.
Thank those on and then Bob just a question for you just to pick up on the comments you made.
About the M&A environment and.
I guess my question is when you're thinking about or looking at high growth company.
A year ago or two years ago when.
And there was a lot of focus on revenue model revenue multiples and Tam within like profit and cash flow were sort of.
Taking a backseat I think in terms of a whole lot of the valuation discussions that were being had so has that changed also like as youre looking.
Looking at.
High growth companies is there may be more of a consideration now in terms of profitability and cash flow than maybe where were those sellers expectations were or how they were trying to value of the businesses before.
Yes.
From our perspective, we've always focused on profit and cash and what we looked at in any.
Potential partnership whether it's an acquisition or a seed investment is with the long term growth of that business and then in our business model.
Kind of profit and cash that we generate off of that once we put it in place and have the synergies and access to the resources of this companies for US devaluation has always been based on long term profit and cash having said that we weren't in theory competing against people who are just looking at revenue multiples.
As recent as a year ago.
We have had conversations with potential sellers, who are talking about valuations they were getting from specs or the fact that think you go out to the IPO market and those are very different valuation models and what we're looking at so as we said we remain disciplined as we always have we'd rather have an alternative partnership structure as we've done with colored by the <unk>.
<unk> and met Cafe.
We're up for acquisitions.
And we've done some of those which have performed well in our business, but we're not going to overpay and we've never been caught up evaluate anything on a multiple of sales.
Alright, Thanks, Bob.
Okay. Thank.
Thank you.
The next question comes from Bonnie Herzog with Goldman Sachs. Please go ahead.
Thank you good morning, everyone.
Good morning.
On your coffee business, I guess I'd be curious to hear some more color on the consumer and whether youre seeing any signs of down trading with an axe.
Actually that could affect your pod attach rates going forward during the quarter and I think youre PON attach rate decelerated a bit so wondering how big of a risk do you see from lower coffee pod consumption in an economic slowdown with.
Thinking about the possibility that consumers start growing ground coffee and their homes, even if they do own one of their breweries or.
But thinking about your comments, you expect something like that to be more than offset by incremental consumers switching back to consuming coffee and their homes.
Thanks.
Yes. So the first part is household penetration is the biggest driver of growth in our coffee systems more than attachment rate. So as we've talked about we have 3 million households per year for the past two years. We saw that is above our long term trend of 2 million households, and so our expectation continues to be the $2 million is the right right.
Both rate for us on household penetration attachment rate has been remarkably consistent over the long term. The only difference was during COVID-19. We saw an increase in attachment rate that has been working down gradually from that peak to pre COVID-19 levels and there is a little bit of noise even in this quarter.
A bigger reopening where people are going out of home.
And that's actually been strong as our business has been that's actually been a negative factor that's been weighing against that strong growth that we've had and that's just about in our opinion. It's just about done we're almost back to fully open interestingly. The one area that hasn't reopened fully our offices and so still in front of us is the opportunity to recapture even more growth.
In our office coffee business with regard to trade offs. We have studied this a number of different ways and I referenced in our prepared remarks that we went back and looked at the last recession across all CPG categories coffee in CSD are among the most resilient if not the most resilient in all CPG for the reasons that I talk.
About and.
And we don't see any trade off in between.
Coffee forms of coffee within the Hull you see over the quarter, a slight increase in private label parts.
And some reduction in premium part if you recall during COVID-19. The reverse is true so it's almost.
Version back to the long term.
Trends and.
And even if that does happen remember week makes a great majority of private label parts. So this is a business as well protected against all forms within single serve and honestly, we do not see trade offs between other forms of coffee and if there is a real recessionary impact we know that people go from out of home consumption to in home consumption, which would be a new.
Net positive for us.
Alright makes sense. Thank you so much.
Okay. Thanks, Brian .
The next question comes from Kevin Grundy with Jefferies. Please go ahead.
Great. Thanks, good morning, everyone.
Good morning, Tim I wanted to touch on.
Good morning, Bob.
SG&A came in a bit higher I think there was some mention of higher marketing spending in PB I think to a lesser extent in coffee.
A near term dynamic to that maybe talk about what youre coping with in that line item SG&A and then within that investment levels.
And then those on and for both of you Bob as well, what's the right level for advertising and marketing you guys reduced as did many others within the industry. During COVID-19 at one point it was 6% as a percent of sales, we're still kind of attacking in the low 4% area. Maybe just comment on what the right level is longer term and when you expect to get back to that thank you.
Yes, thanks, Kevin So I will start with the first part of your question.
When you look to our SM G&A line in fact.
Quite they'd be the pluses or minuses and its aligned that.
That a lot of cost elements actually get together and we consolidate so let me try to expand it as a bit provide fed or shedding a little bit further light first of all we have the transportation and warehousing expenses that are included in that line.
<unk>, obviously has been one of the most volatile and installation at spending.
Spending line item for us and the PNW transportation and warehouse represents almost the biggest increase factor in the SG&A line that you are looking at and the second big bucket that we have in that SG&A line is as you set up <unk> and promotion and we had some good levels of increase.
Investments behind our brands. So that also included in that line and also the whole labor.
Across our company with the exception of manufacturing or production related which is quoted <unk> that leaves us with all of the frontline employees, we have including our DSD, including <unk>.
Merchandising, including our white collar and as you know labor, especially on the frontline has been one of the most pressurized line item throughout the year, starting last year, so that increase.
It is also included and the remainder are fully all the overheads.
After that are included in that line that attended having an inflationary factors and as you see there are so many pluses or minuses in that line, but I think these are the four factors that explain.
The majority of the increase in that line up on the can you talk about the marketing piece.
Covid forced wide number of changes in the way, we do business, obviously, you're not going to recap all of those.
Some of those experiences were good learnings that we want to continue in the future. Some of them are saying, okay. We want to go back to the way things work. So I think it's really reset the level of marketing spend that's required.
We were all forced to work with lower marketing spend it causes us to be.
Much more sensitive about return on investment and dial up our understanding in terms of a precision marketing perspective, I think the best evidence that we were able to do that successfully is the strength of our brand portfolio and Thats really where the proof is in the and so for US it became much more of a focus on which brands we wanted to support the portfolio at <unk>.
Critical levels, what tactics do we want to use and then how do we use all of the data is now available to be able to target more precisely and course, correct that's worked pretty well.
As we say all of that if you think about the strap plan that we took you through on Investor day. Our long term plan is to continue to increase marketing over time. The reason is because we have more ideas for growth and we're supporting right now and that's a great position to be in and so.
I think as we continue to whether all of the pluses and minuses of inflation and recession.
The volatility over the past three years is nothing like any of us experienced over our careers.
We will increase our marketing spend over time, but as we sit here today the strength of our brands really speaks to our ability to navigate this environment.
Very good thank you both.
Okay.
The next question comes from Lauren Lieberman with Barclays. Please go ahead.
Great. Thanks, good morning, everyone.
Your line is talk a bit about brewer sales and you called out the Emperor volumes were down 4% versus I think it was 29% in comparison, so to some extent very much.
As expected, but of course retailers have been signaling.
Challenges with smaller household appliances discretionary items at the start so I just wanted to get your perspective on brewer sales and for the balance of the year, knowing again, you've got some pretty big comparisons.
What you're seeing if anything from retailers in terms of pushback on inventory.
And Bob I know you referenced again.
Traditional run rate of 2 million households per year, but does that still feel feasible marathon on average rate over time does that is that really a feasible edition.
In this economic environment. Thanks to this year in particular, yes, let me start with the last part because that is the most important part which is household penetration.
It feels like every year, we get asked questions about why this is the year, we can't do 2 million households, and so I would say there is no indication.
Other it's COVID-19 COVID-19 recovery recession inflationary environment that our ability to add 2 million households per year is very very steady and strong and we have a ton of confidence in that.
That leads us to more than 10 years of household penetration growth at the at the size of the available market. So that area I think we're in good shape on the second point I would make and we say that even when we have incredibly strong brewer sales quarters correlation between brewer sales and household penetration is loose there's some correlation over time.
It's not what you might think and clearly on a quarter to quarter basis, There's zero correlation.
As you point out just last year, we added 3 million new households to the system, we sold more than 11 million Brewers that tells you that the majority of Brewers sold are replacements or upgrades and we certainly have been giving people reason to upgrade with the addition of new features and benefits of new design, so with that in context, when we say 3 million households, a year ago.
This year 11 million Brewers, a year ago year to date, our brewer sales are down approximately 5%.
And we're up on a two year basis or a same time period in the 30% to 40% range, we're taking pricing on growers that we see inflation there like everything else would I expect some elasticity effect definitely but I see it not impacting household penetration I see it is impacting some of the upgrade cycles, which were.
Perfectly fine with as you know, we don't really make money on Brewers, It's really in service of household penetration of coffee consumption. So all of our core assumptions are very much intact.
Fantastic. Thank you and then just the one question though.
On retail inventory levels pushback from retailers and get the top up sure.
Yes. It is.
Is definitely an issue and as you know.
The shift in consumer behavior caught many of them by surprise and so they are overstocked with goods that have long lead times that are not selling.
But we're in a category that sells incredibly well as I said, we're talking about 5% volume change of 11 million units.
This is still a very good growth and profit opportunity and again most of the brewer most of the retailers that sell Brewers also sell parts and then I know that every time they convert a household over from drip coffee maker of single serve the great majority of those future pod purchases go to the retailer who sold the Brewers.
And as a significant trade up in profitability for them. So this is not the area. They are looking to cut back on inventory right. Now. This is while it is still one of the best growth and profit drivers and their entire store. So this is not where they are focusing.
Okay fantastic. Thanks, so much.
Sure.
The next question comes from Chris Carey with Wells Fargo Securities. Please go ahead.
Hi, good morning.
Good morning. My question is specifically on coffee pricing. So just looking at pricing in the coffee segment in the quarter. It does look like partner and private label pricing remains pretty minimal to PDP, even though we can see these partner private label operators.
Raising pricing.
How much more substantially in tracked channels.
Can you maybe just.
Do you have any commentary on when you think the overall pricing within the coffee segment will be more consistent with the pricing that we're seeing in the overall category, which is quite a bit higher than I just have a quick follow up.
Sure.
Thanks for the question Chris.
Updates would be a bad debt if I focus.
On our own let's say owned and licensed products in terms of the pricing and how much we are seeing crude realization as I was articulating a couple of minutes ago, we have taken pricing actions across all of our portfolios and in coffee, which is owned and licensed brands that we control obviously, the pricing and therefore for that.
<unk> of it including our April was as Bob just said so we have taken a few pricing actions last year, which was in 2021 and early this year.
Quarter, one and towards the end of quarter, two Israel and when you look to the numbers that we have announced for example in the quarter you would see that the almost 6% of the price realization that we have successfully achieved across our coffee portfolio and then you look to the IRI or Nielsen data you will see.
Several action plans that the other industry players decided to take place and when you look to the private label part, which is also important but as Bob said, let's make sure that we remind ourselves that we still produce for the most part of the private label category that will also contribute to the economic benefit.
Of that at the same time private label initially was that it was slow to take the pricing actions, but when you look to the latest data it is.
Part also has gone up therefore.
We are very.
Really happy with.
The resiliency of our owned and licensed brands that have shown and how their consumption is moving across the portfolio with regards to the pricing actions.
And as you have seen.
Besides the single serve the other segments or sub segments of coffee that also have also taken the pricing in line with more of this.
What's going on especially with regards to the coffee bean prices.
I'll just add one thing to it just as a reminder of our concept that we've discussed in the past, which I will admit it's a bit complex and that is the fact that our pricing realization on our P&L understate that gap between what you're seeing at retail and what we're seeing in large part not the only reason, but in large part because we're not responsible for the green coffee purchases of our <unk>.
<unk> so the biggest inflationary impact within coffee right now is the green coffee impact our partners take that on their P&L. We're just doing the conversion for them and so what happens is it understates what feels like our pricing realization relative to the market because a big part of the cost structure does not flow through our P&L.
Got it.
That's great. That's very helpful. Then just a quick follow up.
On coffee as well.
The expectation last quarter was four pod shipments remained below consumption. It does feel like pie volumes came in ahead of expectations. This quarter did you catch up quicker than you had thought are you in a better position going into the back half than you were thinking.
At the end of last quarter and.
Is there any over shipment dynamics that we should be keeping in mind as regard to the back half as well. So thanks for just that contextual I think the supply chain and the pipelines as well.
Yes, I mean, the good news as we said in our remarks is that our coffee recovery was accelerated we made an investment to do so it cost us on the P&L to do so but we're in a position as we exited Q2, where we have good inventories full service to our partners and our retailers and would that enable us to do is to catch up in the second quarter on.
Some of that missed opportunity in the first quarter and so we said that we were going to be below consumption in the first half.
And then above consumption in second half, we've largely caught up in the second quarter as a result of that so going forward, our consumption and shipments should be largely balanced.
Okay. Thanks, Bob.
The next question comes from Brett Cooper with consumer Edge Research. Please go ahead.
Yes.
Okay.
It was for me.
Can you update us on the.
South Carolina, how much capacity that opens up to you and how that fits into your ability to bring in new customers and then just second question Bob Your M&A focus primarily on portfolio expansion expansion relative to prior comments, which were quarter. So just one question on how the.
Relative to just an example.
So.
Thanks for the question Brett So let me take the first part with.
In regards to the South Carolina coffee plant that we have been building as we as we said previously is Spartanburg is now planned for 2023.
And as a reminder, as we also spoke before we've begun in fact production.
K Cup on our first line in June 2021.
Make sure that this is a large facility that will take multiyear stuff.
Desktops due to the seven outlines that we are putting in as we discussed before they out of Osama slow ramping up due to 100% related to coffee.
<unk> excuse me issues that came out of the hour line manufacturer that run into.
In Europe .
Likely to buy.
Therefore.
Those times are being catching up as we speak right now and we are still scheduled to put.
The lines some of the lines into service, starting 2023 onwards, which was in line with our expectations.
Yes, I think on the M&A question.
Your point is correct in that.
Conversation that we just had was primarily on portfolio wide space, but I would say that our total landscape that we're looking at across the whole M&A opportunity as portfolio wide space, new platforms geographic expansion and new capability, that's very consistent with what we talked about in Investor day still is the case.
<unk>.
Youre. My examples are our two most recent small but very strategic add ons H a peak is both filling in white space.
So Canada.
And we've got these great Canadian and Mexican businesses that we can add through M&A and then tractors a great example, as well because again is that white space, but it really leverages, new capabilities and new strength in our fountain foodservice business. We've got the capabilities that we can build with scale. So we look across that entire landscape and our findings.
And in my remarks from quite a few I think very productive conversations.
Was there a follow up Mr. Cooper.
No. Thank you.
Alright, Thanks, Brian next thank you.
The next question comes from Andrea to Shera with J P. Morgan. Please go ahead.
Thank you good morning, I have a question and two follow ups first on for Bob how are the pod straight away.
Away from home is excellent.
Same thing and then can you speak about the volume mix, but now more focused on the packaged beverage business.
Are you seeing any signs of a more cautious consumer on the opinion water side as you exit the quarter any signs of increased elasticity.
I understand you don't break down volume mix spending doesn't mind, perhaps mix running faster than volumes in this scenario and any signs that we are still ahead of us.
And then one for Josh.
I'll put it out there on the safety of margins that you provided the math of the guidance implies obviously, both gross margin and EBIT margin will likely be down in Q3 year over year, but perhaps you know to make the math work for the guidance flat in Q4, I just want to make sure that we got it right. Thank you.
Yes, let me start with the cold beverage right.
In terms of any trade down or a change behaviors not seeing anything right. Now is theoretically as you move into a recession, you would see small outlets convenience channels being more pressured gas prices always do that.
And you would see more sensitivity around tax.
And sizes, but if theres any changes very very small right now so nothing that we would be able to report this concrete based on the data its all things that may happen in the future with regard to <unk>, we don't specifically break out our away from home business has the size, but it's been a heavy.
Drag on our business since the beginning of Covid and in fact, we gave somebody go back we gave some very specific numbers about how much it was down and how much of a drag that put on our total growth.
The recovery on that has been incremental quarter by quarter, but we're still well below pre COVID-19 levels in any way from all business, so that represents future upside to us.
And the mobility that I was talking about before is really people consuming in home versus consuming out of home in other words like a coffee shop, and Thats still recovering back to the COVID-19 levels, but it's all built into our.
Expectations in all of our guidance reflects everything I just talked about they're not sure about the margin, yes, exactly so it's important.
To reiterate we will digest said few minutes ago that we ask on the input cost side, we're largely covered for the remainder of the year, which we do also have a good line of sight with regards to the price realization. So these are two important points and then we step back and look at it because you asked a question on your mind you. This is <unk>.
Portland relation net inflation.
Pricing annual productivity equation in quarter, one the inflation came in at 15% as we just spoke quarter to inflation came in at 17%.
And we also expect quarter three to be the to be a little higher than in quarter two.
So we are getting more pricing benefit in Q3 due to the actions that we have successfully implemented that would be.
That would help us to offset these further inflation headwinds that we had expected to happen in our business.
At the same time.
We also expect quarter, four installation to be more or less half.
<unk> versus what we have seen in Q3 versus last year, why because last year in quarter. Four in 2021, we have seen significant spike across the board.
In.
Most of our input costs that drove a big installation at a number. So we are lapping against that one so that's very important to figure that out as well. So what does this leave us. This gives us that we will realize the full benefits of pricing that we have already taken.
It will enable us to offset the inflation and deliver the margin growth in quarter, four that would be our expectations in order to sum up.
By second half as well as the split between quarter, three and the quarter before.
That's very helpful. Just one classic.
Clarification on the way from the index that Bob had said away from home is that still about 80% of what it was back prior to Covid.
Okay.
We're not we haven't talked about that specifically so.
Okay. That's fair, Thank you and I'll pass it on.
The next question comes from Steve Powers with Deutsche Bank. Please go ahead.
Hey, Thanks, Good morning, two questions from me the first one.
The first one on beverage concentrates maybe maybe a little bit of clarification I was hoping you could parse out.
More of the underlying run rate and realized pricing versus the trade accrual impacts this quarter.
Clarification, if that if that trade accrual impact or something that we should expect will reverse or if it's discrete quarter.
Hi, Steve.
Take.
The beverage concentrates you would've specific trade accrual question first of all it would be helpful to talk about the trade accruals are basically part of our normal 80, nice some quarters plus some quarters, it's negative and obviously, we do our best in order to estimate as close as possible.
As you know because of all these ever changing macroeconomic situations really making.
Difficult to get almost 100% precision first of all that's the reason of this trade accrual and the trade accrual.
Timing.
Yes.
Also account.
Let's say for more than I do.
The health the health of the price realization that we have.
Experiencing quarter, two and as we have seen in our numbers.
Do we expect this to try to come back as a negative in the other quarters no absolutely that's not the.
The expectation or that's not the reality of what's going to happen.
Yeah.
Okay perfect. That's helpful and then I guess.
I think Bob.
Or it was on either one just to build on on Lauren's question on household penetration I think you adjust 2022.
<unk>.
But as you said you get asked every year. So just looking ahead to the extent that consumer confidence and discretionary spending continues to come under pressure I guess I'm just curious how the how the playbook changes on household acquisitions.
In a tour recessionary environment, whether that comes in terms of just.
A more precise value messaging different emphasis on the assortment of Brewers, you might bring to market or however, you think about.
That playbook in a recession to the extent that it is different.
Excellent question do you think about our.
Capabilities here, we have a wide range of price points on Brewers, and we have a wide range of price points on pause, let me cover the entry level price points, all the way up to now Super premium as we talked about on the call dollar per pod coffee, all the way down to entry level price points, which are up 30%.
And the same applies to Brewers, where we have borrowers that are now around $50 right it needs to be below $50 that due to inflation around $50. All the way up to about 200 $250. So we're able to take that range and have the right mix by retailer and target consumers with the appropriate price points. The other one.
<unk>.
Is that if you think about these new brewers that we're introducing that are much more capable of producing specialty coffee and actually ice coffee, we're able to deliver messages that do have a value message to them because the price comparison between.
Cups and ground is one thing, but the price comparison between cups and out of home coffee is dramatic it's five to 10 X. The cost to go out of hall. So the more that we're able to allow consumers to replicate the coffee shop experience and haul it actually allows us to dial up this away from home to in home value messaging and our communications is very good.
Bill.
We haven't we haven't we have a number of options within our toolkit.
And it's exactly the way we're thinking about it the way that you laid it out.
Okay. Thank you very much that helps I appreciate it okay.
The last question today will come from Robert <unk> with Evercore. Please go ahead.
Great. Thank you very much.
Just wondering if you can give us an update on the CFO search.
And maybe remind us what youre looking for in terms of experience and skill set and then Theres also been some other management changes, maybe just kind of give us a sense of what the team looks like today, the kind of changes that you've made and how you see.
The organization from a senior management perspective going forward. Thank you.
Yes. Good morning, Good morning, Robert So let me take the CFO front and a couple of follow up to your questions on this one first of all.
We wanted to be with regard to the CFO search and as we as we said before we are looking forward to recruit a world class CFO that not only via the <unk> today's complexity and the size of our business for the but also the future that we are building a modern and beverage company. So thats important and is going well.
At the same time.
I am also happy to say and we are fortunate to have a deep bench of content.
And have a very skilled and experienced executive in fact.
Georgia is sitting next to me today on the scope and Josh like with like I said as we have announced publicly stepping in on as interim CFO .
That's very important to note. So there is no any gap in the Kennedy the experience as well as the.
<unk> necessarily north Asia to petroleum with Youtube without creating any go with regards to the other positions that may.
It may be looking for as well as the internal promotions that took place at this point in time, let's be clear on one thing we do not have any open positions we have.
<unk>.
On the jobs that we will be either looking for external or the promotions that took place on an internal basis.
And there will be a healthy handle where when we have the external candidates in place. So it's not a situation that somewhat left positions open and we are looking to recruit externally. So that's important to make sure that the continuity is 100% debt.
And then just in terms of the CFO I mean, theres cfos, who are more financially oriented and other ones that are more operationally oriented any any thoughts along those lines.
I mean, it is absolutely I agree with you. It is important to focus on the CFO unnecessarily credentials and the knowledge and the experience, but there's also another effect that we should not forget which would be the overall finance team that supports the CFO and Mr back and look at it to the server.
Seven.
Finance leadership team executives that we have at <unk> today, all of those roles being occupied and serviced by the executive World class expertise. Therefore, we do have a very strong financing below the CFO rich definitely helpful to perform this is CFO activities.
And we're not necessarily looking for to go.
Or find one is specific expertise what matters for us is to be able to operate on a cross functional basis across our company.
And most importantly contribute to the growth agenda of a company that we are very excited given all the opportunities that lie ahead of us.
Terrific. Thank you very much.
Youre welcome.
This concludes our question and answer session I would like to turn the conference back over to the company for any closing remarks.
Thank you operator, and thank you everyone for joining this morning, if you have any questions or follow ups shaken our around all day. Please reach out we'd be happy to talk to you and answer any questions. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].